According to the “internet encyclopedia” Wikipedia, there are over 53,000 people in the United States age 100 or above. Because of improvements in areas such as health, nutrition and medicine, people are living longer and the number of people living to 100 and beyond is increasing.
The life insurance marketplace has adjusted and policies today are issued with maturity ages of 120 and beyond. But what happens with an older policy that matures at age 100? Unfortunately, often not what you (and your clients) may expect.
Whole Life (WL) insurance was the first permanent life insurance product designed (even guaranteed) to provide a full death benefit at maturity as long as it was fully funded. However, as we know, not all of our clients fully fund their policy. WL policies have a loan feature (see earlier Blog, When Is An Automatic Premium Loan Not Automatic?) that allows the policy to “pay for itself” from an internal policy loan. While this is a convenient feature for cash strapped clients, it will drive the policy death benefit down as the policy loan grows, causing the policy to mature for something less than full death benefit. Another issue with WL policies has to do with Term blends. To lower the cost of the policy, many WL policies were designed with a base death benefit coupled with a Term component. In theory, the policies were designed so over time the dividends were used to convert the Term portion to base death benefit. At maturity the Term portion would be completely converted to base death benefit so that the full death benefit would be paid (the Term portion of the policy does not pay a death benefit at maturity). In reality, insufficient funding and dividend drop over time will cause many of these policies to mature with something less than a full death benefit.
Older Universal Life policies (including Variable Universal Life) that mature at 100 often mature for the cash value only, which can create two major issues. First, if the policy contract matures for the cash value, not the death benefit, than the proceeds could be subject to taxation, just as if the policy were surrendered. The amount received over cost basis would be subject to income tax rates, not capital gains tax rates.
The second and more common issue is that many policies will mature with minimal cash value. There is an old adage with life insurance…”I want to die with a dollar of cash value in my policy.” Unfortunately for some who live to maturity, a dollar is about all they get.
So what should you do?
Know your policy contracts and what happens at maturity. Make sure that all of your clients are well aware if the policy pays less than the full death benefit at maturity by getting that understanding in writing and making it part of the trust file. If your insured is healthy and still insurable, see if there are newer alternatives that may provide coverage past age 100. It may be that the trust can even save money – a win/win.
As with all TOLI issues, be proactive, make sure all are aware (including beneficiaries) and document the trust file.
Good advice. I would add that many UL polcies will lapse prior to age 100 unless premiums and/or benefits are adjusted along the way. Typically adjustments should be made to keep the cash value (or shadow account) from decreasing. You may need to manage a gradually decreasing benefit to keep a permanent portion.
If adjustments are not made soon enough, an underfunded UL can reach guideline limits that only allow you to pay premiums for the term costs once the cash value is depleted. Typically that is not practical and often companies cannot illustrate what these term costs would be.
Agreed. We review, track and manage the policies on an annual basis and manage the premium to maximize the ROR on the policy death benefit, with the use of life expectancy (LE) reports, if necessary. Have not run into too many issues with guideline limit issues, but would note that if you are a fiduciary, like a TOLI trustee, you need to make sure all (including beneficiaries) are aware of any “gradually decreasing benefit.” Thanks for the comment.
I should clarify that the trustee or policy owner would need to request gradually decreasing benefits with a request for each decrease and work to calculate what that should be each time. I do not know of any carrier who does this calculation automatically, but hope they would in the future. I would like to know how many automatically calculate catch-up premiums for policy notices or premium billings particularly for GUL. The bottom line is that unless you know the insured will not outlive the policy, you would want to avoid having the shadow account decrease.